As I write this the vote in Greece is going on, and the expectation is that it will pass. Futures have been on a rampage all morning, echoing big gains in Europe. Other than one spike down (which was huge) on a leaked headline that appears to have been false, the bottom line is that the markets love people being bent over the table for the banksters – especially central banksters and those in Germany.
The media, of course, is calling this an “uprising” in Greece. What they’re not talking about is why it is so important to “save” Greece in this regard.
The incessant continuation of outright financial scams and frauds among the world’s banking interests, and the people’s refusal to force it to stop, is the continuing outrage of this now-global mess. And let’s not kid ourselves – it is a scam.
The correct thing to do was to go back to what Brooksley Born advised at the time – do not allow OTC trading of credit derivatives at all. She was right, and she was run out of town on a rail for being right. I have maintained the same position, and the reason is simple: These instruments exist, in the main, for the explicit purpose of falsely claiming that a particular credit is “covered” and “money good” without proof that it actually is – that is, that the person ultimately responsible to pay the swap can do so.
Exchange-trading solves all all of these problems. Those swaps that can’t be exchange-traded fall into two categories: Those where the writer has no capital to back up their position and those that are too illiquid to find a reasonable market.
In the latter case the solution is simple: Break up the contract into two or more contracts for simpler things until you find a liquid market for them. For example, the “hybrid” contract that a farm conglomerate may want on the price of corn and the price of diesel fuel can be broken up into futures contracts for both corn and diesel. Both are exchange traded and sufficiently liquid.
In the former case the so-called “market” and so-called “protection” is a scam. In each and every case where the former applies the correct solution is to demand that these contracts either be confirmed as payable in full each and every day or deem them void for lack of consideration and fraud in the inducement and tear them up.
This, in the main, is the cause of all this crap in the economy. These unbacked bets that cannot be paid, if exposed, blow up the banks and insurance companies who either wrote them (without capital) or are relying on them to claim that their debt holdings are “money good.”
The utter refusal of our regulators to force the market price to be what everyone counts their assets as worth, including forcing those who claim to have “default insurance” as part of that valuation to prove that their counterparty can pay in full, is why we are here. It is why the market blew up in 2008 and it is why it is going to blow up again.
That this outcome would manifest was known in the 1990s. Greenspan and Congress did not care, and neither did President Clinton. Both sides of the aisle knelt before the banksters and performed an obscene act – repeatedly – allowing them through false pretense to claim “profits” that did not exist at the time and in fact never existed.
Now we’re right back where we started, but this time it’s sovereign debt that’s in the game instead of AIG and Lehman. We’re now talking about the solvency of The ECB as opposed to a private company. And once again we have banks that have gamed the situation, much as they did with PPIP, buying up credits “on the cheap” and then threatening that the world will end unless they get the ability to screw the public yet one more time.
But the fact remains that these exercises do not actually solve the problem of excessive leverage. Attempting to transfer this risk to sovereigns – that is, the taxpayer – does not and cannot work. It is not possible to fix a compound function that is running away from you by continuing to pretend it is not!
Greece’s Parliament, as I close here, has reportedly passed the austerity program. We now get to see how long this “sticksave” lasts before people realize that the fundamental changes that are necessary to bring these economies and banking systems back into balance have not been made and thus all we’ve actually done is make the situation worse rather than fix it.